Ivanhoe release rankles Rio

Relations between
Rio Tinto
and Toronto-listed Ivanhoe Mines have hit another hurdle, with the release of some gloomy cost estimates for the reluctant partners’ massive Oyu Tolgoi project in Mongolia.

Brokers have responded negatively to a 513-page technical report on the world’s biggest copper-gold project that raises legitimate concerns about potential delays and cost blowouts. It makes for worrying reading.

As well as warning that underground production on the project could be delayed by 12 months, ­Ivanhoe flagged a blowout in operating costs.

The report, completed by AMC Consultants and released just before Easter, says the mine would produce copper at a cash cost of US81¢ a pound, including byproducts, for the life of the mine, compared with the US62¢ a pound outlined in a 2010 study.

The problem for investors trying to determine the reliability of these latest forecasts is that Rio Tinto and the company building the project, Oyu Tolgoi LLC, have not signed off on the report. This is despite the fact that Rio owns 51 per cent of Ivanhoe, which released the assessment.

While they have not publicly disputed the figures, it is clear Rio is not happy, particularly after the release of a report it never signed off on wiped almost 8 per cent off Ivanhoe’s shares in Toronto last week.

It is understood Rio was given a narrow window to comment on the draft report. While Ivanhoe did take some of Rio’s comments on board, it did not send the final report to Rio or the Oyu Tolgoi LLC board for final approval.

Rio understandably wants to complete its own assessment of the assumptions made in the technical report, which was prepared by a group of independent engineering companies in March 2012, based on information available on December 31 last year. Rio’s feasibility study into the project’s second stage is due by the end of 2012.

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The issue for investors and the project itself is that Ivanhoe is saying one thing while Rio and the company building the project are saying nothing, although this is mainly because they need to complete their own detailed studies to work out whether the projections are accurate.

What it does do is highlight the friction between Rio and Ivanhoe, which was controlled by founder
Robert Friedland
until Rio reluctantly took control in January.

Rio’s interest in Ivanhoe is of course its 66 per cent stake in Oyu Tolgoi, not Ivanhoe’s other assets. However, it has been left with little choice but to work with Ivanhoe to find a solution.

Taking a majority stake has not resolved ongoing tensions between the two companies that has dogged the project for years.

Oyu Tolgoi is expected to account for a third of Mongolia’s gross domestic product by 2020 and is reshaping the country economically and culturally.

The latest incident also highlights uncertainties over efforts to secure funding for the project.

Ivanhoe has been discussing potential bridging finance arrangements with an international bank and Rio before putting in place a $US4 billion project finance facility in the third quarter. Rio has provided a $US1.8 billion bridging loan to help Ivanhoe keep funding the project before the finance facility is in place.

In a United States Securities and Exchange Commission filing, Ivanhoe notes that it had drawn down $US972.1 million on the facility at March 19, while Rio had withheld funding of $US132.3 million until Ivanhoe gave it confirmation there had been no material adverse effects.

It is understood that Rio has since released the $US132.3 million to Ivanhoe.

Ivanhoe notes that financial market uncertainty means it needs to raise equity before the second quarter and is looking at alternatives, including a rights offering.

Ivanhoe’s problem is that Rio can in effect veto debt financing transactions. “If Rio Tinto declines to approve a proposal for third party debt financing and, as an alternative, offers to provide its own debt financing, Ivanhoe Mines may have no effective alternative than to accept Rio Tinto’s proposal to provide such financing even if the terms proposed are less favourable than those available from a third party," Ivanhoe argues.

Ivanhoe is also worried it may not be able to obtain any debt financing at all, which could force it into a dilutive equity raising or force a fire sale of non-core assets.

Ivanhoe said late last month it expected the project costs at Oyu Tolgoi had risen to $US6.2 billion, from $US6 billion previously, but it was on track for commercial production by the first half of next year.

The drawn-out saga that has been Foxtel’s $1.9 billion takeover bid for regional pay television provider
Austar
is expected to come to a close today.

The Australian Competition Consumer Commission is due to rule on the long-running deal, ending almost a year of uncertainty over efforts to merge Australia’s two pay TV companies.

However, anyone who has been following what must be one of Australia’s longest-running corporate takeovers knows to expect the un­expected. The ACCC missed a previous deadline of March 29, which meant its ruling was not out before a March 30 vote by Austar shareholders on the deal.

Releasing its findings today means the court dates will not have to be pushed out again to accommodate the competition regulator, and provides some comfort to Foxtel’s shareholders.

Both sides are optimistic a deal will be completed by the end of this week. Negotiations with the ACCC over the past few weeks are understood to have centred on specific wording of the undertakings rather than any new developments.

This is not to say a last-minute stumbling block is impossible.

New regulatory concerns surfaced last month in the latest round of industry consultation that followed Foxtel’s undertaking to free up content including Disney, ESPN and the Discovery Channel to competitors.

The negotiations have been made complex by Foxtel’s shareholder base, which includes
Telstra
with 50 per cent, along with
Rupert Murdoch
’s
News Corporation
and
James Packer
’s
Consolidated Media
, with 25 per cent each.

Austar’s share price, which firmed in the past month as investors became more confident of a deal, last traded at $1.48 on Thursday, compared with the $1.52 offer price.

Austar chief executive
John Porter
told shareholders in Sydney earlier this month that allegations of hacking by the News Corp-owned NDS business were not relevant to the merger and would not figure in ACCC deliberations.

The real question over this deal is whether there is still value in a combined pay TV group as the digital revolution transforms the way consumers watch TV.

Hedge funds are still betting a deal will provide value, at least in the short term. The decision will also be vital for ACCC chairman
Rod Sims
, who has promised to take a less “theoretical" approach to assessing mergers.

Executive remuneration is back in the spotlight as several companies prepare to hold annual general meetings over the next month.

The real test for the government’s “two-strike" rule governing executive pay takes place this year, with the jury still out on exactly how effective efforts to inject a reality check into executive pay have been.

The coverage of comments from
ANZ Banking Group
boss
Phil Chronican
last week, comparing attitudes towards executive salaries with those of pop stars, highlights how contentious the issue is.

A glitch in the new rules also means more than 100 company boards could be removed by shareholders because their executives cannot vote their own shares to approve pay packets. This still needs to be sorted out.

Governance and proxy voting firm CGI Glass Lewis found in its 2011 annual report that some boards were braver than others on this issue.

CGI Glass director of research Aaron Bertinetti argues there is a “vanilla-isation" of executive remuneration practices.

Instead of motivating and retaining the best executives for the job, companies will take the path of least resistance with their shareholder base and introduce similar remuneration practices to tick the right boxes and avoid a strike.

Some fund managers argue executive pay reports are too complex, while some executives, such as Chronican, want fund managers to disclose their pay.